question-mark-us-map

Published August 10, 2023  |  By Timothy M. Ravich, Senior Counsel at Tressler LLP

            On June 27, 2023, in the case of Mallory v. Norfolk Southern Railway Co., 600 U.S. ____ (2023), the U.S. Supreme Court upheld a Pennsylvania law requiring “foreign” corporations—those neither headquartered nor incorporated in the state—to register to do business there.  The Court also upheld a related state statute providing that, in exchange for access to the Pennsylvania market achieved through registration, non-Pennsylvania corporations effectively consent to the jurisdiction of Pennsylvania courts to decide any and all claims against them—even those having nothing do with Pennsylvania.  See 15 Pa. Cons. Stat. § 411(a) (2014); 42 Cons. Stat. §§ 55301(a)(2)(i)(b) (2019). 

            Pennsylvania’s own Supreme Court opined that the statute “clearly, palpably, and plainly violates the Constitution,” but the U.S. Supreme Court, in a 4-1-4 plurality opinion disagreed, deciding that Pennsylvania’s registration-based jurisdiction scheme did not violate the Due Process Clause of the Fourteenth Amendment to the Constitution.

            This article explains the case and its profound implications for corporate defendants with operations around the nation as well as details why the decision may be short-lived.

            Background

            Mallory arose from a lawsuit initially filed by Robert Mallory, a freight-car mechanic, who worked for more than 20 years with the Norfolk Southern Railway Co.  After leaving the company, Mr. Mallory was diagnosed with cancer, a circumstance he attributed to his work spraying boxcar pipes with asbestos, handling chemicals in the railroad’s paint shop, and demolishing car interiors that contained carcinogens. Mr. Mallory filed a lawsuit under a federal workers’ compensation scheme permitting railroad employees to recover damages for their employers’ negligence.  See Federal Employers’ Liability Act, 45 U.S.C. §§ 51-60.

            Notably, Mr. Mallory, a Virginian, hired Pennsylvania lawyers to bring his lawsuit in Pennsylvania state court.  He did so on the basis of Pennsylvania’s registration-based jurisdiction statute, which requires out-of-state companies to register to do business in the Commonwealth, and as a consequence of doing so, consent to appear in that state’s courts on “any cause of action” against them. Norfolk Southern Railway Co. had so registered, and according to Mr. Mallory, therefore consented to a lawsuit against it in Pennsylvania on claims just like his.

            The Norfolk Southern Railway Co. challenged the lawsuit on constitutional grounds, arguing that any effort by a Pennsylvania court to exercise general personal jurisdiction over it would offend the Due Process Clause of the Fourteenth Amendment.  In support, the out-of-state defendant railroad company argued that Mr. Mallory’s complaint alleged that he was exposed to carcinogens in Ohio and Virigina (but never Pennsylvania).  In addition, at the time of the lawsuit, Mr. Mallory resided in Virginia, the same state in which Norfolk Southern Railway Co. was both incorporated and headquartered.

            The Pennsylvania Supreme Court agreed, though it also acknowledged that its decision ran contrary to a recent decision by the Georgia Supreme Court that rejected a similar due process argument from a corporate defendant.  See Cooper Tire & Rubber Co. v. McCall, 863 S.E.2d 81 (Ga. 2021).

            Given the split of authority between Georgia and Pennsylvania, the U.S. Supreme Court agreed to hear Mr. Mallory’s appeal and to decide whether the Due Process Clause of the Fourteenth Amendment prohibits a state from requiring an out-of-state corporation to consent to personal jurisdiction to do business there.

            Consent-Based Jurisdiction

            Justice Neil Gorsuch, who wrote the majority opinion in Mallory (joined by Justices Clarence Thomas, Sonia Sotomayor and Ketanji Brown Jackson (who also wrote a separate concurrence as to the result)) reversed the decision of the Pennsylvania Supreme Court and decided against Norfolk Southern Railway Co., concluding that “[t]he question before us is not a new one.  In truth, it is a very old question—and one this Court resolved in Pennsylvania Fire Ins. Co. of Philadelphia v. Gold Issue Mining & Miling Co., 243 U.S. 93 (1917).”

            The 1910s-era Pennsylvania Fire case arose when an insurance company incorporated under Pennsylvania law, refused to pay on a policy after a smelter owned by an Arizona company was destroyed by a fire caused by lightning.  The Arizona company sued the insurance company, but chose to file the suit in a Missouri state court rather than in Colorado (where the contract was formed), Arizona (its home state) or Pennsylvania (the insurer’s home state).  The insurer objected to the proceeding in Missouri, arguing that the Due Process Clause protected it from answering in a Missouri court for a case with no connection to the state. The Missouri Supreme Court disagreed, however, drawing on Missouri law requiring out-of-state insurance companies to appoint a state official for service of process and justifying this by comparing corporations to individuals in terms of jurisdiction.

            Dissatisfied with the decision, the insurer in Pennsylvania Fire appealed the case to the U.S. Supreme Court—and lost.  Justice Oliver Wendell Holmes, writing for a unanimous court, rejected Pennsylvania Fire’s due process argument, stating that there was “no doubt” that the company could be sued in Missouri, given that it had agreed to accept service of process in Missouri as a condition of doing business there.

            According to Justice Gorsuch, the precedent of Pennsylvania Fire was binding and controlling of the outcome of the Mallory case.  Much like the Missouri law, the Pennsylvania law in controversy in Mallory mandates out-of-state corporations to register with the Department of State before conducting business in the Commonwealth.  Additionally, the Pennsylvania law registration process requires corporations to maintain an office in the Commonwealth, subjecting them to the same rights, privileges, liabilities, restrictions, duties and penalties imposed on domestic (i.e., in-state) entities, the majority opinion reasoned.

            In reaching this result, Justice Gorsuch rejected Norfolk Southern Railway Co.’s argument that Pennsylvania Fire should be overturned on the basis of the Supreme Court’s seminal mid-century decision International Shoe Co. v. Washington, 326 U.S. 310 (1945), which established that the Due Process Clause allows only two types of personal jurisdiction over a corporate defendant: (1) “specific jurisdiction,” which refers to lawsuits arising from a corporation’s activities within the state; and (2) “general jurisdiction,” which allows all kinds of lawsuits against a corporation, but only in the states where it is incorporated or has its principal place of business (i.e., where the defendant is “at home”).

            According to Justice Gorsuch, however, International Shoe was centered on the issue of an out-of-state corporate defendant refusing to consent to jurisdiction of another state’s court system whereas Pennsylvania Fire and Mr. Mallory’s lawsuit involved the opposite scenario—Norfolk Southern Railway, Co. consented to jurisdiction as a function of registering to do business in Pennsylvania.  Additionally, Justice Gorsuch opined that International Shoe determined that a state could sue a corporation for claims related to its in-state activities, regardless of whether the corporation registered or agreed to be present in that state. Thus, International Shoe simply provided an “additional road to jurisdiction over out-of-state corporations,” without overruling other traditional methods.

            Justice Gorsuch also justified the Mallory decision as fair by inventorying the many connections between Norfolk Southern Railway Co. and the state of Pennsylvania, demonstrating the company’s regular, systematic, and extensive business in the state.  For example, the corporation had been registered to do business in Pennsylvania for several years before Mr. Mallory’s claim arose. It established an office, retained almost 5,000 employees, maintained over 2,400 miles of tracks, and even identified itself as a proud part of the “Pennsylvania Community.” By 2020, it had more tracks in Pennsylvania than in any other state, employing more people than it did at its headquarters in Virginia—a fact broadly marketed and touted by Norfolk Southern Railway Co. itself.  “Given all of this, [Justice Gorsuch asked rhetorically,] on what plausible account could International Shoe’s concerns with ‘fair play and substantial justice’ require a Pennsylvania court to turn aside Mr. Mallory’s suit?”

            Finally, Justice Gorsuch addressed the issue of federalism, i.e., the relationship among the 50 states and between the 50 states and the national government.  While some personal jurisdiction cases have discussed federalism implications of one state’s assertion of jurisdiction over the corporate residents of another, Justice Gorsuch acknowledged, the Supreme Court had “never found a Due Process Clause problem sounding in federalism when an out-of-state defendant submits to suit in the forum State.”  Accordingly, Mallory held that Due Process Clause was not violated by Pennsylvania’s registration-based jurisdictional scheme.

            (In a concurring opinion, Justice Jackson agreed that “this case is straightforward under our precedents,” but wrote separately to discuss another case decided by the U.S. Supreme Court, Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U. S. 694 (1982), which made the issue presented by Norfolk Southern Railway Co. “easily answered.”  Insurance Corp. of Ireland, Justice Jackson recounted, supported the notion that personal jurisdiction is an individual, waivable right that, anchored in the due process requirement, ensures a state has sufficient contact with a defendant to maintain a lawsuit in line with traditional notions of justice. In this respect, Justice Jackson wrote, Norfolk Southern Railway Co. knowingly waived its rights by registering as a foreign corporation in Pennsylvania, accepting the jurisdictional implications and benefits of doing business in the state. Consequently, it could not claim a violation of its due process rights when asked to defend itself in Pennsylvania’s courts.).

            In Dissent: From Contact to Consent?

            Writing in dissent (along with Justices John Roberts, Elena Kagan and Brett Kavanaugh), Justice Amy Coney Barrett observed that for the past 75 years, the Due Process Clause has stipulated that state courts cannot claim general jurisdiction over foreign defendants simply because they operate within the state—a principle affirmed by International Shoe.

            Despite this long-standing precedent, Mallory had endorsed a general jurisdiction scheme that relied on a finding of “consent” rather than on the conventional analysis that focused on contacts, Justice Barrett wrote. “What Mallory calls ‘consent,’ is what the Pennsylvania Supreme Court called ‘compelled submission to general jurisdiction by legislative command,’” Justice Barrett sharply criticized the majority.  What is more, while the Mallory decision did not officially overturn the Court’s traditional approach to jurisdiction, “it might as well,” wrote Justice Barrett, as Pennsylvania’s law effectively sidestepped established jurisdictional approaches by essentially renaming state’s long-arm statutes and allowing states to engineer “consent” to personal jurisdiction.

            Justice Barrett also expressed concerns about how Mallory would impact the relationship among states and the federal system, a foundational concept established by the U.S. Constitution: “When a State announces a blanket rule that ignores the territorial boundaries on its power, federalism interests are implicated, too.”  In this context, Justice Barrett concluded, Mallory failed a basic tenet of the Due Process Clause—to protect a defendant’s right to resist the judicial authority of a sovereign with which it has insufficient ties and prevent state courts from overstepping their bounds within the federal system.

            What Mallory Means for Businesses

            Under Mallory, the opportunity for corporations to manifest consent (or not) to general personal jurisdiction is undisturbed in the context of contract law.  For example, corporations can elect to enter (or not) agreements with forum selection clauses.  In addition, corporate defendants may specify the particular venue and jurisdiction for resolving future disputes.  Parties also can agree to “choice of law” notwithstanding jurisdiction.  Meanwhile, procedurally, corporate defendants are wise to appear only “specially” in the preliminary proceedings of cases to which they object to jurisdiction in order to safeguard against a waiver of personal jurisdiction.

            But, as the dissent states, in the context of tort law, Mallory has created a treacherous environment for corporate defendants, coming close to effecting a dramatic “sea change” in federal civil procedure that threatens to render the entire concept of “specific” jurisdiction as applied to corporate defendants “superfluous.”  And, as Justice Samuel Alito makes clear in a concurring opinion to Mallory, registration-jurisdiction statutes are likely to impose a significant burden on interstate commerce by now requiring foreign corporations to defend themselves concerning all transactions, including those with no connection to a given forum. In Justice Alito’s words, such laws lead to foreseeable serious consequences:

  • They impose operational burdens on out-of-state companies and create intolerable unpredictability in conducting business across state borders.
  • Large companies may manage the patchwork of liability regimes, damages caps and local rules in each state, but this could devastate small companies, which constitute the majority of all U.S. corporations.
  • Large companies may employ creative corporate structuring to limit their vulnerability to lawsuits. But, in contrast, small companies might prudently avoid entering an out-of-state market due to the increased risk of litigation.
  • Some companies might avoid registration entirely, preferring to risk the consequences rather than expand their exposure to general jurisdiction. This situation creates a lose-lose scenario where corporations need to manage added risk, and plaintiffs face challenges in serving unregistered corporations.

            Conclusion

            Under the U.S. Supreme Court’s recent decision in Mallory, a state’s assertion of jurisdiction over a non-resident company for a lawsuit by a non-resident plaintiff, concerning issues unrelated to the state, passes muster under the Due Process Clause of the Constitution.  Thus, cases with odd jurisdictional configurations such as Mallory—in which a Virginia plaintiff sued a Virginia corporation in Pennsylvania state court for events arising in Ohio—are increasingly likely.           

            But, while perhaps not violative of the Due Process Clause of the Fourteenth Amendment, registration-based jurisdiction of the kind involved in Mallory appears vulnerable to an attack based on different part of the U.S. Constitution—the Commerce Clause—the dormant Commerce Clause, in particular.

            In this respect, Justice Alito’s concurring opinion offers a path away from Mallory. Specifically, Justice Alito asserted that Pennsylvania’s jurisdiction law could be seen as discriminatory towards non-resident firms and posing substantial burdens on interstate commerce, fulfilling no legitimate local public interest that does not disproportionately weigh on commerce to pass Commerce Clause scrutiny:

It’s challenging to discern any such interest in requiring an out-of-state company to defend against a lawsuit by an out-of-state plaintiff on claims entirely disconnected from Pennsylvania. Although a state has valid interest in regulating in-state activities and providing a forum for in-state harm redress, it doesn’t typically have a legitimate local interest in upholding rights of non-residents harmed by external actors through non-local actions. Even if a valid local interest could be identified, it’s questionable whether any local benefits of the state’s jurisdiction assertion could outweigh the significant burdens on interstate commerce.

The U.S. Supreme Court had no occasion in Mallory to consider a dormant Commerce Clause theory as applied to Norfolk Southern Railway Co. because the Pennsylvania Supreme Court did not address the question and the U.S. Supreme Court did not grant review to consider the question.  “Accordingly,” Justice Gorsuch acknowledged in the majority opinion, “any argument along those lines remains for consideration on remand.”

            In the meantime, corporate defendants adapting to a post-Mallory world in which consent schemes of the sort upheld in Georgia and Pennsylvania can survive Due Process challenges have at least two parallel options:

  • Defensive Strategy: Because Mallory creates disincentives for foreign corporations to do business in certain states, corporations that do not want to share Norfolk Southern Railway Co.’s fate (at least in the short term) might be wise, as a practical matter, to avoid those states and minimize their contacts with them.
  • Offensive Strategy: Participatory Democracy—Corporations should urge Congress to exercise its own plenary powers under the Commerce Clause and, as Justice Alito writes, “modify the degree to which states would be able to entertain suits involving out-of-state parties and conduct.” 

            In the final analysis, expect forum shopping while corporate defendants perhaps work to attack Mallory judicially and legislatively under the dormant Commerce Clause theory offered by Justice Alito, to which four other (dissenting) Justices seem poised to jump onboard.

About Timothy M. Ravich

Timothy Ravich Aviation Attorney

Timothy M. Ravich concentrates his practice in the areas of aviation, product and general civil litigation. Recognized as one of only 50 lawyers qualified as a Board-Certified Expert in the area of aviation law, Tim specializes in transactional and regulatory matters related to the ownership, maintenance and utilization of aircraft, airports and airspace. Click here to read Tim's full attorney biography.